Vol. 32, Issue 2 - Spring 2009
Paul Krugman Addresses Global Economic Crisis
The 2009 Princeton Colloquium on Public and International Affairs
by Sarah Vitali '11
Paul Krugman, recipient of the 2008 Nobel Prize in Economics, discussed the current economic crisis and its implications for the global community on April 18 in the keynote speech of the 2009 Princeton Colloquium on Public and International Affairs.
Though there are those who would still argue that today’s global economic situation has not quite yet reached the ‘depression’ stage, Krugman argued that, regardless of semantics, the measures that can and should be taken now are those that would react to such a financial event.
“Whether or not it’s a depression, it is a return to depression economics,” he said.
In running over the possible reasons for the current crisis, Krugman stressed the somewhat artificial nature of the current crisis, that is to say, the fact that it has arisen not out of any actual shortage, but rather through the fiscal policies of certain institutions.
“This is not a case where the planet has run out of resources, that’s some future crisis, it’s not a case where you don’t have the ability to recover,” he said. “What we’ve got is a snafu, a screw-up, the economy crossing wires.”
Krugman expressed his view that recent news coverage of the crisis has, perhaps, not maintained the dire tone that would seem to be in keeping with a financial event of this magnitude. This, he posited, was for the simple reason that things in the past few weeks have not been degenerating as rapidly as they appeared to be previously. But even this mild optimism, he warned, might be misleading.
“The flow of news has turned a little less shockingly bad,” he said. “It is not a case of things improving. It is, at best, a case of things getting worse more slowly.”
At the same time, Krugman made it clear that the consequences of the crisis for the average person could become very real, very quickly. For instance, if the economic crisis continues at its current rate, Krugman predicted that the unemployment rate in the United States could possibly reach 12%.
“We’re hoping that doesn’t happen, but it’s not wildly unreasonable right now,” he said.
Krugman also expressed doubts about the ability to resolve this crisis by traditional methods, reflecting that, in the current era of globalization, isolated national solutions may no longer be valid.
“[Economic recovery] has normally been through exports,” he said. “But there’s a problem, which is that this is a global slump, and we can’t all export our way out of it, unless we find another planet to sell to.”
Krugman sees no end in sight for the crisis, either for the United States, or for the world at large.
“There is some concern that this will be even deeper, even longer than the typical bad crisis,” he said. “Even if it does stabilize, this is going to be almost certainly very prolonged and very nasty.”
As to the actions the Obama administration is currently taking against the crisis, Krugman feels that, though they are certainly a step in the right direction, a more decisive and aggressive policy of economic stimulus is needed.
“It’s a plan that mitigates, but certainly doesn’t fully offset the shock,” he said.
Krugman stated that things were better under the Obama administration than they might have been otherwise, but stressed that mistakes have been made.
“As it happens, the package is only replacing about 40% of the revenue lost by state governments,” he said. “It should have done more. Unfortunately, that was precisely the piece that was cut. We should have done more of that, but we also should have done more infrastructure.”
In general, Krugman indicated that the crisis was caused by overconfidence, and that the only way out of it is to take extreme remedial measures. What these measures will be, though, remains unclear even to economists.
“The problem is figuring out we don’t know as much about economics as we thought we did, and equally important, getting the political will to do things that may be controversial, but may be really essential,” he said. “I think we will come back, that we will in fact be able to get a serious bank fix and a serious stimulus package, and really do what needs to be done.”
Looking towards a future beyond the current economic crisis, Krugman said that the ultimate solution to future banking troubles could be a simple one: make the banking industry less interesting, that is to say, more regulated and less innovative.
“There are many factors that made this [economic crisis] possible, but if there is one single thing, it was the fact that the banking sector just got too exciting,” he said. “What we need is to go back to a boring, circumscribed banking system.”
But for now, unsure of what the future holds, Krugman views the current economic crisis as a dire situation, and did not seek to mitigate the feeling of doom-and-gloom that surrounds the issue.
“Intellectually, it’s interesting; personally it’s terrifying,” he said. “This is the scariest thing that I’ve ever fought in my years as an economist.”